Impax Environmental Markets: Well-Placed To Weather The Storm

The £1.3bn Impax Environmental Markets (LON: IEM) aims to generate long-term capital growth by investing in companies that are providing innovative solutions to the world’s environmental challenges. It mainly focuses on areas such as: clean energy and energy efficiency; water treatment and pollution control; as well as waste technology and resource management.

IEM typically invests in quality and growth stocks operating in the small and mid-cap end of the spectrum, with many of these types of companies struggling in the face of rising interest rates. This is reflected in the annual results to the end of December that revealed a 15% decline in NAV, compared to a fall of 8.1% in the MSCI All Country World index (ACWI).

The company behind it, Impax Asset Management, is a genuine pioneer of investing in environmental markets and has always been transparent in its approach to ESG factors. It has a significant depth of resource in this specialist field with a team of around 80 professionals and assets under management of £40bn.

Compelling Long-Term Argument

Impax believe that companies offering solutions to the sustainability challenges facing the world will tend to outperform the wider market over the long-term. High fossil fuel prices and concerns about energy security, combined with efforts to mitigate and adapt to climate change, support the economics of energy efficiency investments and reinforce the case for the transition away from hydrocarbons and towards renewables.

There have been some substantial policy initiatives to support this process. These include: the €210bn REPowerEU legislation which is designed to rapidly reduce dependence on Russian fossil fuels; the Inflation Reduction Act in the US that incorporates $369bn in green technology subsidies; as well as changes of government in Australia and Brazil that have improved the climate policy outlook.

The broker Investec believes that the secular growth drivers of environmental markets are deeply entrenched and set to intensify as extreme weather conditions occur with increasing regularity. They also say that the invasion of the Ukraine is causing a major re-think on fuel security and acting as a powerful catalyst for greater focus on renewable sources of energy.

Outlook

Impax think that the portfolio is well-placed to cope with further market stress, with a focus on economically defensive sectors and companies with strong balance sheets. Valuations are no longer as stretched as they were with the portfolio’s forward PE ratio falling from 24.6x to 18.4x over the course of last year, leaving it in line with the long-term averages.

The broker Numis says that IEM benefits from an experienced management team with a strategy that has been popular with retail investors. They point out that the thematic approach will mean that the performance can deviate from the wider market although they expect it to continue to benefit from the focus on ESG.

Despite the underperformance last year the longer term figures are still reasonable with a five-year NAV shareholder annualised return of 11.4%, versus 7.7% for the MSCI ACWI. Investors can take further comfort from the zero-discount policy that has recently resulted in the company making selected share buybacks.